Russia’s Crony Capitalism: Stagnant But Stable?
On March 13, 2017, Chairman of the CASE Advisory Council and Senior Fellow at the Atlantic Council, Anders Aslund presented his views on Russia’s economic system and prospects for Russia’s economy during the 148th mBank – CASE seminar.
President Putin’s model of economic governance
Over recent years exogenous economic factors have imposed substantial stress on Russia’s economy. However, despite an ever-decreasing standard of living, introduced by recent adverse shocks such as the oil price crush and the imposition of economic (and in particular financial) sanctions, the current government appears comfortably in control. In his presentation, Dr. Aslund attributed the persistence of the current status quo to four elements that in his view describe President Putin’s model: conservative macroeconomic policy; state and crony capitalism; protectionism; and, an efficient form of authoritarianism.
Between 2000 and 2004 Russia underwent a series of significant market reforms that were hailed as steps towards economic modernization. However, legislative transformation did not follow suit, as the period’s significant human rights violations, offer early indications of Russia’s vision of liberalization à la carte. Between 2004 and 2008 the country went through an economic shake up, as the government turned towards more pronounced forms of State Capitalism. This wave of centralization of economic clout was re-enforced between 2008 and 2012, when cronies consolidated power through asset stripping of unprecedented magnitude. This laid the groundwork for the later de-facto institutionalization of a system of crony capitalism, and outright manual management, performed by President Putin.
The first element: Conservative Macroeconomic Policy
To avoid sudden changes in terms of living standard, President Putin subscribed to a doctrine of macroeconomic conservatism, described by five policy-targets: small budget deficit and public debt; foreign currency reserves of significant magnitude; large trade surpluses; low unemployment; low inflation.
Since 2000, Russia has consistently recorded big budget surpluses in good times (8% of GDP in 2005) and moderate deficits in difficult ones; notably, during the crisis of 2008-2009, the country only recorded deficits of close to 6% of GDP. This macroeconomic conservatism is also exhibited by extremely low levels of public debt (currently at 13% of GDP), and sizeable trade surpluses. Even after the oil price crushed, Russia’s imports have remained approximately half of the country’s exports. Meanwhile, the country’s macroeconomic stance is supported via maintaining sizeable capital buffers in the form of foreign currency and gold reserves (currently at $400 bn.).
In his presentation, Dr. Aslund underlined that Russia’s capacity to maintain continuous current account surpluses is largely linked to the country’s monetary policy. Market operations result in a strong co-movement between the price of oil and the value of the country’s currency, the ruble (which is allowed to float freely). Meanwhile, consistency of strict monetary policy keeps inflation at bay, securing only a modest drop in revenues. Given this mechanism, Dr. Aslund holds that so long the price of oil does not drop below $30 per barrel, there is no reason to expect that Russia will face significant problems.
The second element: State and Crony Capitalism
Principal pillar of economic power for the Russian government is the country’s oil production. Between 1994 and 2004 production rose by 50%. This highlighted the government’s long-held perception that high gas and oil prices bear sufficient benefits to outweigh the necessity for good governance.
“Petrostate” economics have permitted the emergence and sustainment of state and crony capitalism – one of the country’s big problems. Between 2005 and 2015, the country’s state sector surged from 35% to 70% of GDP. Immense expansion of state sector has been limiting the country’s growth potential, impeding on efficiency gains, as state enterprises are taking over private ones. Meanwhile, the common practice of involuntary acquisition further depresses economic growth, through stifling investment figures, by depressing the value of enterprises.
The third element: Protectionism
The third element, which contributes to the preservation of the status quo, is Russia’s trade protectionism. Through the use of the Eurasia Economic Union, a customs union that serves as an attempt to block the WTO, Russia achieves to boost external demand for its goods. Nevertheless, the sustainment of this union comes at a great cost, as Belarus remains dependent on subsidies, while Kirgizstan’s recent experience with heightened macroeconomic volatility has been closely linked to the country’s union membership. Armenia and Kazakhstan appear to be the only countries pursuing membership on self-interest, which however is more closely linked to strategic than economic grounds.
The fourth element: Efficient Authoritarianism
In his rule, President Putin governs through three circles of power: the security services (FSB and FSO), state corporations (Gazprom, Rosneft, Rostec, VTB) and a number of cronies (such as Timchenko, Rotenberg, and Kovalchuk), who have risen to power during periods of major asset stripping, sanctioned by the government through the award of privileged contracts.
All three circles are extensively involved in criminal activities. This widespread kleptocracy is, according to Dr. Aslund, a principal determinant of country’s extremely dim reform outlook.
The real economy and future outlook
Following the past years’ antisocial policies, Russia’s standing in the world declined significantly. Today, the country ranks as the world’s 40th biggest economy, with $1.2 tr. GDP, a 36-place decline from 2014’s $2.1 tr. worth of output. Meanwhile, expectations for the coming year set annual GDP growth at a meagre 1%. Moreover, real wages contracted by 10% in 2015 and 5% in 2016, while investment contracted by 8.4% in 2015 and 2.3% in 2016.
Based on Dr. Aslund’s research, this reflects President Putin’s limited interest in maintaining investment or aggregate output at high levels. Instead, fiscal and monetary authorities in the country are preoccupied with defeating inflation through strong adherence to doctrines of macroeconomic conservatism. This leads to a future economic outlook for the country that involves persistence of economic stagnation (with growth rates around 1% to 2%), further deterioration of the living standard, and subdued investment spending, both across state and private sector.
Dr. Aslund also forecasts a weak probability of political change. Over the coming years, popularity surges through a media circus, which fixates on the importance of small victorious wars, such as Crimea and Syria, are expected to contribute to an extremely slow demise of the incumbent regime.
Following the conclusion of the presentation, discussions touched on subjects including the effect of sanctions on the Russian economy, the sustainability of the system of governance imposed by President Putin and the costs involved in the sustainment of annexed territories.
Download the presentation: link
Watch the seminar on Bankier.tv: link (in Polish)
